The Domino effect: How America’s confiscation of Russian assets backfires

Louis N. Kizito 

What you need to know:

  • The international system founded on rules-based norms has collapsed, and we should adopt as such. 

The U.S. Senate Committee on Foreign Relations approved legislation last Wednesday intending to confiscate the Russian central bank’s foreign exchange reserve holdings.

The money realized from these assets will go towards funding the Ukrainian war effort. These reserve assets usually include U.S. Treasury securities together with cash deposits in Euros and Dollars.

Following the fall of the Soviet Union, the Russian central bank started holding U.S. Treasury Securities with varying maturities as part of its foreign exchange reserves.

But when Elvira Nabiullian took over as head of the Russian central bank, she allocated 25 percent of the entire Russian central bank reserve assets for physical gold stored in Russia. She foresaw this geopolitical risk of extreme reliance on US Treasury securities. About $300 billion of Russian reserves are held in US Treasury securities.

In 1979, the United States stopped issuing tangible paper certificates for its government treasury securities. U.S. securities are now issued and kept in electronic format, something experts refer to as dematerialized securities.

The majority of these dematerialized U.S. Treasury holdings owned by Russia are held or deposited in the Belgian Securities Central Depository, known as Euro-clear. A tiny percentage of these securities are also held by other European banks, including Deutsche Bank.

The United States and its allies froze the majority of these securities when Russia invaded Ukraine in February 2022.

The Russian Central Bank was unable to sell, trade, or even collect interest on these assets, even though Russia still owned them.

All they were doing was locking themselves in. However, this law that received bi-partisan approval in the U.S. Senate now seeks to seize these assets by February 2024.

Freezing is not the same as seizures. By freezing, the United States hopes to deprive Russia of its legitimate assets and give them to Ukraine. To raise $300 billion for its war effort, the United States now plans to sell these $300 billion Treasury securities on the secondary market and provide the money to Ukraine.

Remember when the Biden administration asked Congress for a $61 billion aid package so that it could finance Ukraine? The U.S. Congress, however, declined to approve this funding.

The Biden administration now views the asset seizure from the Russian central bank as a cheap way to finance the military campaign in Ukraine. Additionally, the European Union has not approved any more funding for Ukraine.

The US Treasury Market will be weakened by the decision to seize Russia’s $300 billion in reserve assets. If the United States can easily confiscate U.S. Treasury securities or even use those assets as leverage to achieve America’s geopolitical aims, then no central bank in the world will continue to purchase them to make up its reserve holdings.

This action will serve as a signal for many other nations to diversify their foreign reserve holdings even further, shifting their holdings, in part, from U.S. Treasury securities to neutral assets like gold. Currently, assets denominated in US Dollars account for 60% of Global foreign reserves. This action might, however, backfire and weaken the dollar’s hegemonic status as a key reserve currency.

Confiscating Russia’s assets in retaliation for its conflict in Ukraine makes the United States and its allies unable to rely on the principle of “counter-measures” under international law. Unless a state waives its sovereign immunity, assets owned by the government are not subject to international law seizures.

Bank of Uganda’s reserves mostly have U.S Treasury securities, as I discovered when I last examined our reserve assets position. The Bank of Uganda must diversify our reserve positions and holdings into actual gold in light of this event. There is no monetary gold in our reserve holdings. This needs to change. The international system founded on rules-based norms has collapsed, and we should adopt as such. 

Louis N. Kizito               

Twitter: @LouisNkizito